The Estopped Fiduciary: When May Participants Rely on Incorrect Calculations?

Carol Buckmann is an attorney who has practiced in the employee benefits field for over 30 years. This post was originally published at Pensions & Benefits Law.

Mistakes happen. Even in the best-run plans, occasional errors in estimating and calculating benefits are inevitable and sometimes they are caught only years after payments commenced. Fiduciaries are required to follow plan terms, so improper payments are typically cut off. Plans may also seek to recoup past overpayments once the mistake is discovered.

In the Mistaken Fiduciary, I described a situation in which Gabriel, a retiree who had never qualified for benefits at all, sued a plan to prevent it from cutting off his benefits. His suit claimed fiduciary breach and sought to estop the plan from applying its terms to him. The retiree also sought other forms of relief for fiduciary breach.

Gabriel lost his estoppel claim at the district court level, and this result was subsequently affirmed by the U.S. Court of Appeals for the Ninth Circuit. The Ninth Circuit decision clearly states that estoppel is not available where relief, as in Gabriel’s case, would contradict the written plan provisions. However, we have just had another decision in Michigan in which a retiree named Paul successfully sued to estop a plan from correcting pension overpayments. Why did Paul succeed and should plan fiduciaries be worried about this decision?

When is a Fiduciary Estopped from Correcting Overpayments?

It seems to require special circumstances, including harm to the retiree from relying on the incorrect calculation, and not just an honest mistake.

When is a Mistake Equivalent to Fraud?

In Paul, the plaintiff began work as a temporary employee and switched from union to non-union positions at the company. He and his wife met with company representatives prior to his retirement and received a pension calculation statement which overstated his benefit service. The retiree was told that the Company reserved the right to correct errors and that he would be notified if final benefit calculations changed the pension amount. The retiree asked the company representative several times to confirm that the service shown on the statement was correct, and was assured that it was. Notice of the error was not sent until two and one half years after retirement, when it was discovered by the sponsor on self-audit.

The court found that Paul was not just the victim of an honest mistake, but that the Company representatives’s gross negligence in not investigating the answer to Paul’s questions amounted to constructive fraud. Paul claimed that he would not have retired when he did had he known the correct amount of his pension. The court further found that Paul was unaware of the mistake, since he could not calculate his own benefit. The bottom line was that Paul could not be required to repay past overpayments and the plan was estopped from reducing his future payments.

What Can Plans Still Do?

Despite the fact that they didn’t help the plan’s case against Paul, use of clear disclaimers is still a good practice. Regular self-audits should still permit plan sponsors to correct typical honest mistakes. And this whole lawsuit could have been avoided if the elements of Paul’s calculation had been carefully checked when he asked about his service.

Sometimes fiduciaries raise the concern that they are stuck between “a rock and a hard place” if they don’t recoup overpayments, because in addition to worrying about equitable remedies such as estoppel, they may have caused a plan qualification error by not following plan terms. There may also be some relief for this concern: the IRS has just “clarified” its position on correcting defined benefit plan overpayments to permit more leeway. It appears that pension plan sponsors will not always have to request a return of overpayments if they are willing to make up the loss to the plan.

IRS has requested comments on what else it should do about correcting overpayments. The U.S. Supreme Court has also accepted a case to determine whether overpayments of disability benefits need to be tracked in order to be recoverable. That future decision may impact other ERISA plans as well. The law in this area is still in flux, so fiduciaries should stay tuned for further developments.